Analyst Conference Summary

conference date: February 10, 2009 @ 1:30 PM Pacific Time
for quarter ending: January 25, 2009 (1st quarter fiscal 2009)

Forward-looking statements

Overview: Grim quarter from grim economy. Net loss and no end in sight.

Basic data (GAAP) :

Revenues were $1.33 billion, down 35% sequentially from $2.04 billion and down 36% from $2.09 billion year-earlier.

Net loss was $133 million, sequentially reversing the net income of $231 million and the year-earlier net income of $262 million.

EPS (earnings per share) were negative $0.10, down sequentially from positive $0.17 and also down from positive $0.19 year-earlier.

Guidance:

Visibility is extremely limited. Over 2000 positions being eliminated and aim is to do better than $200 million annual decrease in operating expenses. Additional restructuring being considered.

No specific guidance. Expects revenue decreases across all segments. Overall revenue down by more than 30% sequentially, with display and silicon most impacted.

Conference Highlights:

Unprecedented decline in demand is being met with decisive cost reductions. Expects to "weather this recession" with "leading technology and a strong balance sheet." Will have multi-week shutdowns in Q2 and Q3, as well as cuts in executive pay. Balance sheet strength is being preserved, but continuing to invest in technology leadership.

Fab utilization is at historic lows for those factories that are not completely shut down. Memory capacity has been permanently decreased by 10%. Investment in new technology is minimal. Expects capital investment by customers to drop by 50% in 2009, and even that assumes the economy will improve in the second half of the year.

New orders in quarter were $903 million, down from $2.5 billion year-earlier.

Non-GAAP net loss was $3 million, EPS zero ($0.00). That compares to non-GAAP EP of $0.25 year-earlier.

New orders by region: Europe 39%, North America 26%, Japan 17%, Southeast Asia and China 9%; Korea 7%, Taiwan 2%.

Backlog of orders ended was $4.05 billion, down sequentially from $4.85 billion. Financial debookings were $278 million, mostly from Chinese wafer customers.

By segment:

Silicon revenues were $546 million and new orders were $246 million. Revenues were down 27% y/y.

Applied Global services revenues were $345 million with $310 million in new orders. Revenues were down 35% y/y. As customers cut fixed costs, service revenue may strengthen.

Display revenues were $149 million with $26 million in new orders. Display revenues were down 55% y/y. Utilizations are as low as 30 to 40% at some factories. Sees no recovery this year.

Energy (Solar) revenues were $293 million with $321 million in new orders. Solar revenues were down sequentially but up from the year-earlier $122 million. We expect crystaline silicon market down 50% in 2009. In thin-film, SunFab revenue is trending higher, but contracts are being impacted by lack of credit. Revenue from 2nd and 3rd lines was recognized.

Cash, equivalents and investments ended at $3.1 billion. Cash flow from operations was negative at 14% of revenue; free cash flow negative 19%. Accounts receivable decreased to $1.27 billion. Inventories increased to $2.13 billion. Accounts payable decreased to $2.39 billion. Long term debt was nearly flat at $202 million.

Inventory is too high; will be managing down.

Share repurchase program was halted; no plans for Q2. But committed to dividend payments.

Cost of products sold was $942 million, leaving a gross margin of $392 million. Operating expenses included $230 million for R&D, $141 million for General and Administrative, $84 million for marketing, and $133 million for restructuring and asset impairments. Loss from operations was $196 million. Equity losses were $16 million. Interest income was $9 million. There was an income tax benefit of $70 million.

Q&A:

Any effect of recent memory price increases? Price decreases is due to cutback of supply, not demand pickup. No one is anxious to add capacity, but continue to work on next generation technology.

SunFab revenue recognition changes? 9% efficiencies in lab. Expect a signoff in Q2 for first factory. Won't change revenue recognition until after more successful signoffs.

Break even in Silicon? Gross margins are still strong in silicon. Reduced variable costs, but need to continue to invest in R&D to be ready for upturn.

Solar margins? These continue to improve, and vary by product. We have more potential customers lined up.

If DRAM consolidates, how will you come out? It depends on who the consolidator is, but one might be Japanese, one American, and we would come out well in that case.

How many SunFab lines have been shipped, but revenues not recognized? Signed off 3 lines, we have shipped 8 factories, so five remain to be recognized. 34% of our backlog is in energy. This quarter we expect shipments to begin to 2 more factories. Other potential customers are working out their financial arrangements.

How permanent is the DRAM capacity decrease? We think 200 mm is being taken off line permanently, some 300 mm maybe as well.

Spares? Customers are trying to cut spend. When they start buying spares again, that will be a sign capacity utilization is going back up.

Mergers and acquisition? We do think there needs to be some consolidation in semiconductor equipment place. But getting it to happen has been quite difficult. We have no plan for major divestitures.

Inventory? We said we believe we will be subject to the same pressures as the last couple of quarters, but we are working to address the inventory.

Display revenues? Last downturn was different, a milder cycle. We expect revenues to go lower as long as capacity is high and consumer demand is low.

Your guidance seems low compared to taking your past market share and industry wide projections. Does that mean there will be a bounce? You can't project quarterly numbers out in these circumstances. The low level of orders in the industry is unprecedented.

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